Palo Alto Networks, Inc. (PANW) will report fiscal third quarter results after Wednesday's closing bell, with Wall Street analysts expecting earnings per share (EPS) of $1.25 on revenue of $704 million. The maker of high-tech security software rallied to an all-time high in February after beating second quarter expectations but topped out quickly and has been grinding lower for the past three months.
It makes sense to remain on the sidelines heading into the earnings report because market players have lost their appetite for tech stocks in recent weeks, in reaction to stalled trade talks between the United States and China. The threat of retaliation against the sector is also keeping investors on the defensive following the arrest of Huawei's CFO, who is also the daughter of CEO and founder Ren Zhengfei.
PANW Long-Term Chart (2012 – 2019)
The company came public in the mid-$50s in July 2012 and turned higher immediately, topping out at $72.61 in September. The subsequent downturn cut through the IPO opening print in November and ground out a series of lower lows into June 2013's all-time low at $39.06. It tested that level a few months later and completed a double bottom reversal, entering an uptrend that reached the 2012 high in February 2014.
A September breakout attracted strong buying interest, generating a powerful trend advance that continued into July 2015 when the stock topped out just above $200. That marked the highest high for the next three years, ahead of a complex correction that found support in 2016 just above $100. It broke that trading floor in April 2017 but recovered quickly, completing the second double bottom in four years.
The subsequent uptick completed a round trip into the 2015 high in April 2018, yielding an immediate breakout that stalled near $240 in September. Price action since that time has been mixed and volatile, with a V-shaped recovery after a fourth quarter plunge, followed by a failed breakout above the 2018 peak. Even so, the stock is still holding support at the 2015 high, keeping the long-term uptrend fully intact.
The monthly stochastic oscillator entered a buy cycle in January 2019 and reached the overbought level in March. It crossed into a new sell cycle in May, warning market players that relative weakness may continue into the third or fourth quarter. Taken together with macro headwinds hitting the tech sector, it's hard to recommend jumping on board, even if the stock rallies after the news.
PANW Short-Term Chart (2017 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator hit an all-time high in May 2018 when the stock was trading near $200 and posted lower highs during the September and February price peaks. This marks a bearish divergence, but OBV remains close to last year's high, signaling a loyal institutional base despite nine months of whipsaws. While this bodes well for the future, adverse cycles now in play predict range-bound action rather than a breakout.
A Fibonacci grid stretched across the uptrend that started in 2017 places the 2015 high (lower blue line) at the .382 rally retracement level, while the December low is situated at the .618 retracement. This narrow alignment raises the odds that the uptrend has come to an end, but it could take months to confirm or refute that forecast. In the meantime, a 100-point trading range could punish trend followers in both directions.
The Bottom Line
Palo Alto Networks reports earnings on Wednesday evening after the stock failed a breakout above the 2018 high near $240. A quick recovery isn't likely in this scenario, even if the stock gains ground after the news.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.